Complete Genomics: Say No To The Sale - Part 2

It's tragic that Complete Genomics (NASDAQ:GNOM) is being sold for a price that you would put on to expired aspirin. Among all the chatter that has surrounded the company subsequent to the buyout announcement, no one has said that $3.15 is a fair price. In fact, the opposite is true. In my last article in which I told shareholders to "Say No to the Sale," there was an overwhelming and resounding sentiment that this is both tragic and unfair. In fact, every comment that I received from shareholders included a request for how to vote no to the sale. Hence why I am writing this article. Unfortunately, I come bearing bad news. BGI-Shenzhen's offer is a "tender offer," a case in which the board and management don't need a proxy vote from shareholder. BGI simply need to buy a majority of the outstanding shares at the negotiated price (i.e. $3.15), and BGI becomes the majority owner of Complete Genomics. From there, BGI can pretty much do whatever it wants, including buying the rest of the outstanding shares at that price.

In the comment section of that article, I got nearly 100,000 shares to commit to vote no on the deal. Genomics has passionate shareholders who believed in the company, its products, and its leadership. In fact, one guy alone owns more than 75,000 shares. He bought in at $3.40, meaning he will lose $0.25 per share for a total of $18,750. That's a lot of money. More importantly, that really sucks. Worse yet, unless one of the ridiculous number of lawsuits actually prevails, he simply has to accept the loss. In other words despite our outrage and objections, the sale is going to happen. The math is not in our favor.

Complete Genomics has roughly 35 million shares outstanding, excluding options and convertible debts which usually do not have voting rights. This means that for BGI to complete its acquisition, it has to buy anything more than 17.5 million shares (i.e. more that 50%). According to Yahoo Finance, Genomics insiders own about 13% of the company, although that number may be outdated. The latest filing suggests insiders own up to 17%, but for the sake of discussion, we will use the more conservative number. This means that insiders own a little more than 4.5 million shares. More importantly, those shares are already committed to BGI. They have agreed to sell. BGI now needs 13 million shares to control Genomics. This will not be difficult to come by because 52% of the company is owned by institutional investors. It is highly unlikely for mutual funds, hedge funds, or whatever else funds to fight this bid. There isn't enough money in it to spark their passion. Moreover, there will be plenty of retail investors happy to unload their holding for some marginal gain. In other words, resistance is futile (a reference for my fellow Trekkies). It's a done deal. It's over. Complete Genomics will wave the Chinese flag over its corporate headquarters starting next month. I told you I come bearing bad news.

The tender offer began its cycle on September 24, 2012, and will continue until October 23, 2012. The hope and expectation is that BGI will have bought enough shares by then to gain control. If it doesn't, it can simply extend the deadline. In other words, it is all a formality at this point.

One intriguing question that I did received from a reader was what kind of compensation (if any) did the managers receive in order to make this deal happen. The answer is I don't know, and presumably nothing too enticing. After all, they do have a fiduciary responsibly to their shareholders. They are supposed to be protecting us and our investment. However, the existing managers are expected to stay on after the sale is completed. In fact, Complete Genomics is expected to operate as a wholly owned and separate subsidiary of BGI. This means that the managers will continue to operate as usual and will likely receive some new compensation structure. This new compensation structure can be more lucrative than the old structure, but that is pure speculation. We don't know if there were any extra dealings behind close doors, but the lawsuits will give us some hints if they ever make it to court.

Disclosure: I am long GNOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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